Dollar Dependence on the Fourth of July

"...Has the United States confused the cause and effect of monetary vs.
military dominance? To mark Independence Day 2007, let's count the cost..."

ON THIS Fourth of July - and with the Dollar trading at a 26-year low
against the British Pound - it's worth remembering that both Thomas Jefferson
and George Washington implored the United States to avoid foreign entanglements.

Back then, however, Great Britain still ruled the world (if no longer the
Colonies) and the Founding Fathers never guessed the Republic would one day
have to defend the Dollar's "reserve currency" status worldwide.

One hundred years later, Britain's global domination seemed to prove a link
between military power and monetary might. London's gunboat diplomacy of the
late 19th century was matched for success by the Gold Standard backing its
money.

By 1868, only Portugal, Egypt, Canada, Chile and Australia had joined Great
Britain in fixing the value of their currencies to a certain quantity of gold.
Some countries employed both gold and silver; most of the world relied on silver
alone. But forty years later, only China, Persia and a fistful of Central American
basket-cases still declined to use gold exclusively.

"The Gold Standard had become, in effect, the global monetary system," writes
Harvard professor Niall Ferguson in his history of Empire: How Britain Made
the Modern World - and the Gold Standard was run from London.

Fast forward one century again, and the US Federal Reserve has underwritten
the world's confidence in all monetary values for more than six decades. Curiously
enough, however, running the casino seems to have given the US few monopolistic
advantages.

Yes, Old Europe's share of the world economy has shrunk since its various
empires began crumbling in the early 20th century. According to Angus Maddison
in The World Economy: A Millennial Perspective, Western Europe's share
of global GDP fell from one third in 1913 to just one fifth in 1998. But the
United States' share peaked in 1944 - the same year as the Bretton Woods Agreement
crowned the Dollar as king of the world - and it has declined ever since. According
to Maddison's study, undertaken for the Organization for Economic Co-Operation & Development,
it fell from 27% in the early '50s to barely 21% by the turn of the century.

Has the United States confused the cause and effect of monetary dominance?
To mark Independence Day 2007, let's count the cost.

According to the Stockholm International Peace Research Institute, the US
accounted for 47% of the world's total military spending in 2004. By then,
the Pentagon was spending nearly $5 billion per month in Iraq and Afghanistan
alone.

Military spending as a portion of the US economy now outweighs pretty much
everybody's martial burden except China and Saudi Arabia. In this fiscal year,
reckons the War Resisters League, total US military spending - including pensions
paid to ex-service staff, interest owing on previous martial debts, plus military
spending undertaken by non-defense departments of the government - will account
for 51% of total federal expenditure.

The Pentagon now owns or rents 702 overseas bases in some 130 countries, according
to a 2003 Defense Department report, along with another 6,000 bases inside
the United States and its territories. But that analysis failed to mention
Kosovo, Afghanistan, Iraq, Israel, Kuwait, Kyrgyzstan, Qatar, and Uzbekistan.
The report listed only one military base in Okinawa, even though the southern
Japanese island plays host to ten separate US sites. The Marine Air Corps Station
in Futenma alone occupies more than 1,000 acres.

On the eve of Gulf War II, the Defense Department bought 273,000 bottles of Native
Tan sunblock (SPF 15), almost three times its tanning requirement in
1999. By Sept. last year, there were more than 1.4 million US personnel on
active duty - just above 1% of the entire United States population, both
men and women, aged 18-49.

Yet still the Dollar sinks on the global currency markets! Only today, the
Fourth of July, it slipped back to $1.36 per Euro. Free from the clutches of
Queen Elizabeth II, the almighty Dollar also dipped versus the Pound Sterling,
buying just 49.5 pence for the first time since 1981.

Can't an official military budget of $585 billion - plus an extra $142 billion
spent outside the Defense Department - buy a little more stability for the
international Dollar Standard?

"Perhaps the most remarkable thing about Britain's dominance," writes Niall
Ferguson, "was how cheap it was to defend. In 1898 there were 99,000 regular
soldiers stationed in Britain, 75,000 in India and 41,000 elsewhere in the
Empire. The navy required another 100,000 men, and the Indian native army was
148,000 strong. There were barracks and naval coaling stations, 33 of them
in all, dotted all over the world. Yet the total defense budget for 1898 was
just over £40 million - a mere 2.5% of net national product."

This was "world domination on the cheap," Ferguson goes on - and the Gold
Standard in turn helped Britain's exporters secure a huge and growing market
throughout the Dominions.

Here in July 2007, the current world empire - the United States of America
- is a net importer of goods. Almost $2 billion must be lent to the US every
day, in fact, to cover the gap between its income and outgoings. But defending
the currency of the Dollar seems just as important to Washington as the Gold
Standard seemed to Imperial London. Letting the standard slip, however, might
prove just as popular abroad, too.

In 1926, hollowed out by post-war debts that ate half the national budget
each year, Britain opted to put the Pound Sterling back on the Gold Standard
at its pre-war exchange rate. The move, widely blamed for Britain suffering
the '30s Depression ahead of time, came "partly out of fear that the Dominions
would switch to the Dollar if the Pound were devalued," says Ferguson.

But in 1931, when Britain finally quit the Gold Standard for good, "it turned
out that the Pound could be devalued and the Dominions would gladly follow.
Overnight, the Sterling Bloc became the world's largest system of fixed exchange
rates, but a system freed from its gold mooring."

By the eve of the Second World War, the share of British exports going to
other members of the Empire rose from 44% to 48%. The share of imports coming
to Britain from the Empire rose from 30% to 39%.

Devaluing the world standard, in short, could prolong monetary dominance even
as military might wanes. Perhaps the capital city named after George Washington
doesn't need to spend so much on guns, bombs, tanks and grunts.

Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold
today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the
secure, low-cost gold and silver exchange for private investors. It enables
you to buy and sell professional-grade bullion at live prices online, storing
your physical property in market-accredited, non-bank vaults in London, New
York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people
from 97 countries used BullionVault,
owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical
silver (US$129m) as their outright property. There is no minimum investment
and users can deal as little as one gram at a time. Each user's unique holding
is proven, each day, by the public reconciliation of client property with formal
bullion-market bar lists.

BullionVault is a
full member of professional trade body the London Bullion Market Association
(LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious
Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development
body the World Gold Council (www.gold.org)
joined with the internet and technology fund Augmentum Capital, which is backed
by the London listed Rothschild Investment Trust (RIT Capital Partners), in
making an $18.8 million (£12.5m) investment in the business.

Please Note: This article is to inform your thinking, not lead it.
Only you can decide the best place for your money, and any decision you make
will put your money at risk. Information or data included here may have already
been overtaken by events - and must be verified elsewhere - should you choose
to act on it.